By Byron Kaye and Alun John

(Reuters) -Volt Bank Ltd, the first exclusively online bank to gain an Australian banking licence, said on Tuesday it would shut down, returning deposits and selling its mortgage book after failing to raise sufficient funds to support the business.

Its collapse is a further blow to a business model that the Australian government and regulators promoted heavily after a 2018 inquiry into misconduct in the finance industry led to a loosening of rules for new banking entrants.

Rising inflation and interest rates this year have made it harder for online-only banks, called neobanks in Australia, to compete with established lenders, making fundraising much more difficult.

Though the pandemic and COVID-19 restrictions triggered huge demand for home loans in Australia, the shift to working at home also prompted traditional banks to embark on a digital arms race, narrowing approval times for loans and eroding the competitive advantage of neobanks.

"We have considered all options but ultimately we have made this call in the best interest of our customers," Volt founder and CEO Steve Weston said in a statement.

"The entire Volt team is deeply disappointed to have reached this point."

The company had A$113 million ($78 million) in deposits and A$80 million of home loans as of April, according to government data, a tiny fraction of the A$3 trillion mortgage market. The company said no customer would be left out of pocket.

Volt is the third of four prominent neobanks that were approved in an initial wave by Australian regulators to fold or be sold, leaving just privately held Judo, which had $5.5 billion in mortgages in April, government figures show.

A year ago, Volt raised A$85 million, with mortgage broker Australian Finance Group (AFG) paying A$15 million for an 8% stake. Volt returned to the market this February with hopes of raising another A$200 million, a person with knowledge of the plans told Reuters.

AFG said in a statement it was disappointed about Volt's collapse but added its future earnings were not impacted.

The closing also affects customers of cryptocurrency exchange BTC Markets, for which Volt agreed last year to provide banking services. A "very limited amount of customer funds" were with Volt as part of a trial, BTC Markets said in a statement.

Some BTC Markets customers also had access to a Volt-run payment security system to transfer money. BTC Markets said it was contacting them to make alternative arrangements.

DISRUPTORS DISRUPTED

Volt's failure reflects a wider pressure on startups around the world that have taken on the financial establishment with promises of lower overhead, faster turnaround and offerings that traditional rivals have resisted, such as buy-now-pay-later and cryptocurrency processing.